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China's Supreme People's Court (SPC) recently issued two pieces of judicial interpretations, namely, the Provisions of the Supreme People's Court on Certain Issues Related to the Conduct of Judicial Review of Arbitral Cases and the Provisions of the Supreme People's Court on Certain Issues Related to the Reporting System of Arbitral Cases (collectively, New SPC Interpretations).

The New SPC Interpretations became effective on 1 January 2018 and aim to strengthen the arbitration regime in China. Among other things, they extend the judicial reporting system in arbitration-related judicial review procedures to arbitral agreements without foreign elements and domestic arbitral awards. They also clarify the applicable laws in deciding the validity of foreign-related arbitral agreements. These measures aim to ensure judicial consistency across PRC courts and give parties located in China increased options for dispute resolution.

Our alert discusses the implications and key features of the New SPC Interpretations.

What it means for you

For Chinese parties or Foreign Invested Enterprises (FIEs) that are regarded as Chinese entities, the New SPC Interpretations are a positive development.

Previously, the internal reporting system established by the SPC applied only in relation to foreign-related arbitral agreements, foreign-related arbitral awards or foreign arbitral awards. Any Intermediate People's Court intending to invalidate any foreign-related arbitral agreements, set aside foreign-related arbitral awards or deny enforcement of foreign or foreign-related arbitral awards was required to report to the Higher People's Court. If the Higher People's Court agrees with the proposed decision, it should report the case to the SPC for final approval. Without the SPC's final approval, local courts are not allowed to decide against a foreign-related arbitral agreement, a foreign-related award or a foreign award.

Therefore, compared to domestic awards, foreign and foreign-related awards appeared to enjoy special protection under PRC law. However, as FIEs are regarded as Chinese entities, they faced a risk that their cases would not be regarded as foreign-related. There are also procedural differences between domestic and foreign-related judicial review cases. By extending the judicial reporting system to domestic cases, parties who submit their dispute to a domestic arbitration institution will now have greater certainty as to the validity of their arbitral agreements and the enforceability of arbitral awards resulting from those agreements.

The New SPC Interpretations also give parties reason to be optimistic that the new provisions will bring judicial consistency to local courts, and encourage local courts to treat domestic awards and foreign or foreign-related awards equally.

1. This is the first time that the SPC has officially categorized arbitration-related judicial review cases – the six types of cases are:

a) Affirming the validity of an arbitral agreement; b) Setting aside an arbitral award made in China; c) Enforcing arbitral awards made in China; d) Recognizing and enforcing arbitral awards made in Hong Kong, Macau and Taiwan; e) Recognizing and enforcing arbitral awards made in foreign states; and f) Other arbitration-related judicial review cases.

2. The judicial reporting system has been extended to domestic cases and will operate as follows:

a) If the Intermediate People's Court intends to invalidate an arbitral agreement, set aside an arbitral award, or refuse enforcement in a domestic judicial review case, it shall report to and obtain approval from the Higher People’s Court. b) If the Higher People's Court agrees with the decision proposed by the Intermediate Court, it should report the intended decision to the SPC for final approval. This applies only to circumstances where the parties reside in different provinces or if the proposed decision to refuse enforcement or set aside a domestic arbitral award is made on the ground of “violating the public interests."

3. The New SPC Interpretations clarify an ambiguity arising from Article 18 of Law of the People’s Republic of China on Choice of Law for Foreign-related Civil Relationships. Article 18 stipulates that if parties fail to agree on the applicable law of the arbitral agreement, the law of the locality of the arbitral institution or law of the arbitral seat shall apply. This does not resolve the situation where the law of the locality of the arbitral institution conflicts with the law of the arbitral seat. The new provisions confirm that when deciding on the validity of foreign-related arbitral agreements, the law that results in a valid arbitral agreement shall prevail.

Actions to take

These latest developments indicate the SPC’s attitude to streamline judicial approach and encourage domestic arbitration. Parties doing business in China should consider the following steps:

1. Companies located in China, including Chinese companies and FIEs, may consider submitting their disputes under domestic commercial contracts to arbitration institutions located in China such as CIETAC, BAC and SHIAC. They no longer need to create foreign elements such as adding a foreign parent party in the transaction in order to protect their arbitral agreement. When negotiating a commercial contract in China, parties should seek legal advice on how to optimize their options in the event of a dispute.

2. To avoid a potential dispute arising from a conflict between the laws of the locality of the arbitral institution and the law of the arbitral seat, we recommend that parties expressly specify the applicable law of the arbitral agreement in a commercial contact.

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